Archive for August 2015

First, some classical theory that explain such spikes in food commodities anywhere….

“Factors that could affect any food commodity prices can be broadly classified as either supply or demand. Total supply for any given period, a.k.a. the “amount on hand,” has two components: the new harvest and the storage from the previous period. While the amount of storage carried forward reflects some optimal decision from the previous period, the new harvest depends on the area planted and the current yield. The yield in turn reflects both technological advances and idiosyncratic factors, such as weather and seed / fertilizer cost etc. Demand also has two components: consumer demand, both domestic and export for current consumption and speculative storage demand driven by the prices at the time of storage, the storage cost, and expected future prices”.

My take – Onion price spike 2010/11 happened exactly as per the above written script.

1. Rabi storage in April / May was lesser than normal as prevailing prices in April when onion is stored were high.

2. Rains damaged the new harvest

3. Exports continued as if onion business was normal in 2010. Imports didn’t happen.

The buzzwords coined during the spike…

Onion Cartels

One need to find some evidence that supports the allegation that onion merchants anywhere in India colluded to hike the price which is necessary to prove a violation under our or any competition law. Direct evidences such as records of meetings, agreements by way of concerted action suggesting conspiracy, the fixing of prices, and the intent to gain a monopoly or restrict/eliminate competition, could have established the existence of cartelization. Sadly none of the agencies, Government or otherwise including media could provide that evidence during Onion crisis 2010/11.

Hoarding

That onion price spike happened during a period when the stored onion finishes and new fresh crop is arriving. It is a common knowledge in onion trade circles that fresh crop can’t be stored and the already stored crop which is at fag end of storage period can’t be stored further without additional damage, particularly in the traditional onion storage setups of India. Reportedly, simultaneous raids at all major onion production and trading centers by resource rich Govt agencies did not yield any evidence of trader collusion or any other misdemeanour like hoarding. You know what happened because of these raids – Here’s a secret or shall I say truth – Traders stopped onion trading, got the loaded trucks stooped mid-way, for fear of consequences. When you know that even 10 bags at one site would constitute hoarding, you are not a fool to be seen selling one truck (200-300 Bags) Result – dropped supplies – high prices.

Weather

Without an iota of doubt rains played the main spoil sport in onion price spike from November 2010 onwards. However, decline in the production by about 20% in the three major growing states during 2009-10 and 2010-11 due to unseasonal rains does not give a true picture of price spike.

The sharp rise in the prices of onions can be attributed to a decline in Kharif (Monsoon Crop) production on account of unseasonal rains at sowing, transplanting and harvest time in many production pockets in the major onion producing states across India was mainly responsible for price hike.

Though cursory rain fall data analysis for Maharashtra of that time supports this view, even the rainfall data, as presented by India metrological department doesn’t yield much clues as it is the rainfall intensity, its geographical spread, frequency of downpour and timing that matter most for rain fed Kharif crops.

Any significant shortfall or excess in rainfall intensity, its geographical spread, frequency of downpour and timing will spell doom for the onion crop.

Just to give an example if the rains come on time in June and then disappear for the next two months, and then again there is a heavy downpour in August, the average performance of monsoons would be termed near normal. But in the process, the entire freshly sown crop would have withered away necessitating either re-sowing at a higher seed cost or, for many abandoning the Kharif crop altogether.

On the other hand, excessive rains, as was noticed and reported by hundreds of farmers in four onion growing states, is equally true.

In my view onion price spike during December 2010 was a short-run price fluctuation which can be attributed mainly to sizeable, shock, significant weather related shock, captured by the deviation of actual market arrivals from expected arrivals of onion in assembly markets.

Exports & Price Spike

Right entry time and right exit time is important for any business. Onion exports from India no exception. Relation of exports with onion price spike fits perfectly with this contention.

A policy decision was taken by Govt on 2nd November 2010 to reduce the minimum export price (MEP) of onions to encourage exports, in expectation of a drop in the prices of onions during the Kharif harvest. On the contrary, unseasonal rains in Maharashtra, Karnataka and Rajasthan damaged the Kharif crop, resulting in lower arrivals. This resulted in a spurt in onion prices leading to a decision to increase the

To increase the supply of onions in the domestic market, another decision was taken on 20th

December to significantly increase the MEP and the exports of onion were banned until 15th January 2011 due to the sudden spurt in prices. Further, on the next day, an export ban until further orders, was imposed by the directorate general of foreign trade. The ban on onion exports was subsequently lifted on 18th February 2011.

Ordinary decisions taken by extraordinary Govt. mortals. Right! But a careful look at above said dates shall reveal a lot about our lackadaisical approach towards onion export management and raises many questions like:

· Why MEP that was reduced on 2nd Nov was increased just 13 days later?

· Was expectation of price drop due to enhanced arrivals based on pure gut feeling or solid production facts (read crop damage due to rains) or some other reason that fitted well with vested interest of exporters / Govt servant

· My evidence at that time suggested it was crème de crème of onion export agencies that recommended cut in MEP. Those who recommended also included officials of agencies like NHRDF and NAFED who are supposed to be on top of everything related to onion production, arrivals and prices both domestic and overseas.

Media – the proverbialwhipping boy

Other than market integration, the simultaneous increase in the prices of onion across India can also be attributed to a phenomenon known as ‘price parallelism’. Price parallelism is a mirroring effect where traders independently pursue their ‘unilateral non-cooperative best response’ in view of what other rivals are doing. Therefore, there is neither an explicit agreement nor a tacit understanding among the traders.

Media played a very big role in promoting this pan Indian ‘price parallelism’, which eventually was played to hilt by all retailers.

Even otherwise media’s bias towards crisis that hit the demand side is clear as prices of onion crashed to Rs 6 to 8 a kg in the wholesale at Pimpalgaon (No 2 onion market town in India) during second week of February 2011 (just few weeks after the crisis) that farmers blocked roads and staged sit-ins for 10 days following a drastic downturn in the prices. Strangely this never made national news. Read the media role whatever way you want.

Central & State Govt Agencies – Were they also responsible for the spike?

Failure in predicting and preventing the onion price spike is how I would like to sum up in nutshell about their role. To elaborate: With thousands of extension staff and machinery at disposal of State Agriculture and horticulture departments, MOA (Ministry of Agriculture) GOI (Govt. of India), these agencies could have predicted the reduced area under cultivation, arrivals and exact periods of shortage and taken corrective measures like reducing exports and initiating imports.

Who benefited most from Onion Price Spike? Good question! All crises are good for business– Invest your onions.

Farmers

· Those who had the balance physical stock from last Rabi in hand. Not much though.

· Those whose fields had not damaged due to rains or water logging because of heavy rains. Majority of the farmers had however suffered extensive damage to their crops.

· Those farmers whose had planted late and their harvest came about during the crisis time.

· Those farmers harvested immature bulbs to make best use of crisis.

Incidentally this last factor also aggravated the crisis as immature bulbs have very poor shelf life and can’t be transported far away.

Retailers

· In my view they made the maximum money as their mark-up from wholesale prices were exceptionally higher and continued for prolonged period even when the wholesale prices had come down. Being price inelastic, there was no dip in demand.

· Just for example, Safal’s price (read price at quasi Govt shops) on 8th February 2011 in Delhi is Rs 23 a Kg when average price in Pimpalgaon on 8th Feb is just Rs 8.75 a Kg, an eye popping mark-up of 263%.

Wholesalers at assembly markets

· Those who had the balance physical stock from last Rabi in hand. Not much though.

· Those who might have re-traded the onion stock in assembly market itself without physical transactions and outside the APMC mechanism. No evidence though. You’ll need to think hard to visualize this phenomenon usually played in stock markets during old days.

Buying agencies to support Govt’s relief measures.

· Mandated by Central and State Govts to provide relief to customers by subsidizing onion prices, the agencies that purchased onion from assembly markets for organizations like NAFED and NCCF might also have made mullah from the crisis. It was alleged by many that that agencies responsible for buying this onion bought bad quality onion at higher prices. Circumstantial evidences also indicated that one of the agency responsible for purchase of subsidized onions had linkages with some Directors of NAFED.

How to prevent price spikes in future? Let’s do it some other time. As of now enjoy the crisis and let everyone invest their onions.